When Does a Sole Proprietor Need an EIN?
A federal employer identification number, or EIN, is a nine-digit number the IRS assigns to businesses for tax filing and reporting purposes. The IRS uses the EIN to identify the taxpayer. EINs must be used by business entities--corporations, partnerships, and limited liability companies. However, most sole proprietors don't need to obtain an EIN and can use their Social Security numbers instead. Even so, you may want to obtain an EIN anyway.
When EIN Is Required for Sole Proprietors
If you’re a sole proprietor, you must have an EIN to:
- hire employees
- have a Keogh or Solo 401(k) retirement plan,
- buy or inherit an existing business that you operate as a sole proprietorship
- incorporate or form a partnership or limited liability company, or
- file for bankruptcy.
Also, some banks require you to have an EIN before they’ll set up a bank account for your business.
Why To Get an EIN If It's Not Required
You can obtain an EIN even if it is not required, or use your Social Security number. There are two good reasons to use an EIN instead of your Social Security number:
Avoid identity theft
Theft of taxpayer's identities has become a rampant problem--identity thieves steal taxpayer's Social Security numbers and use them to file fraudulent tax returns and obtain tax refunds. For this reason, it's wise to keep your personal Social Security number as private as possible.
If you perform personal services as an independent contractor, you must provide an EIN or Social Security number to your clients, or the client will be required to withhold 28% of your payments. Obtaining an EIN allows you to avoid having to provide your Social Security number to clients and other members of the public.
Help Establish Independent Contractor Status
Using an EIN on your tax returns and payments also helps to show that you’re an independent businessperson—in other words, an independent contractor and not an employee. This can make you more attractive to prospective clients.
How to Obtain an EIN
Obtaining an EIN is easy and free. The fastest and easiest way is to apply directly at the IRS website. The IRS has an online EIN Assistant tool you can use. If you are not comfortable sending information via the Internet, you can download IRS Form SS-4, Application for Employer Identification Number and send it by postal mail. Alternatively, you can receive your EIN by calling the IRS at 800-829-4933 from 7:00 a.m. to 10:00 p.m. local time (Pacific time for Alaska and Hawaii).